Cementing the Future

Market Uncertainties Pose Challenge to Cement Producers

The construction of a half-billion dollar cement factory by Africa's richest man - the Nigerian, Alhaji Aliko Dangote - is ongoing in the West Shoa Zone of the Oromia region. The sector, seen as a priority in the Growth & Transformation Plan, has performed well over the past few years, but some fear that it is becoming saturated. Dangote Cement, the Nigerian company, feel that enhanced development in Ethiopia and the potential of neighbouring markets are enough to make the outlook a positive one, reports MIKIAS MERHATSIDK, FORTUNE STAFF WRITER.

Dangote’s cement factory project to be located 80km from Addis Abeba is only 13pc away from completion of the civil work.

Derba MIDROC Cement Factory, left, a latecomer to the industry and Mugher, one of those that took expansion projects in 2011/12.

Derba MIDROC Cement Factory, left, a latecomer to the industry and Mugher, one of those that took expansion projects in 2011/12.

Megaphones blare safety announcements in Amharic, Chinese and English at a busy worksite, as the workers and machines of Dangote Cement hum together. They are building the cement factory belonging to Africa’s richest man – the 25-billion-dollar Nigerian, Alhaji Aliko Dangote.

Work has been going on here since October, 2011, on the 134ha expanse of land the Company has leased in Rechi Mekoda Kebele, 80km west of Addis Abeba on the outskirts of Mugher, in the Adaberga Wereda of Western Shoa, Oromia. When Fortune visited the site on Wednesday, April 30, 2014, Dangote’s workers, who have already erected four massive storage rooms, power stations and silos, were busy finalising the laboratory and other facilities. The project, which is expected to become operational in November 2014 with a yearly production capacity of 2.5 million tns, is only 13pc away from completion of the civil work. The entire project, including the mechanical and electrical works, is 59pc complete.

This project is part of Dangote’s endeavour to prove that it can succeed in the broad African market, which it seeks to dominate as part of its bid to be listed on the London Stock Exchange(LSE).

Dangote, the 23rd richest person in the world, who studied business at the Al-Azhar University in Cairo, Egypt, established Dangote Industries (Ethiopia) PLC in 2008 as a subsidiary of the Dangote Group – based in Lagos, Nigeria. The group that is engaged in cement, sugar refinery, flour and oil earned in excess of two billion dollars in 2011 and employs around 25,000 people all over the continent.

The Ethiopian business, which will cost 550 million dollars, is part of a three billion dollar entry into the cement markets of 16 African countries, including, as priority targets, Senegal, South Africa and Zambia.

The period between the time when Dangote first entered into Ethiopia and when it began the construction of its factory was characterised by a severe shortage of cement, high prices and large imports – all of which will change in a matter of a few years to the dismay of many of the local manufacturers.

When the government introduced the five year Growth & Transformation Plan (GTP) in 2010/11, cement looked poised for a propitious market.

In 2010, Mugher and Messebo cements were retailing for 400 Br to 500 Br a quintal. In 2011/12, Ethiopia would import 680,000tns of cement, according to the Ethiopian Revenue and Customs Authority (ERCA). The GTP, which was introduced in 2010/11, also had an optimistic expectation of attaining a target demand of 27 million tons.

Between 2007 and 2013, the number of factories to join the market reached 24, with two more, Dangote and Ethio, expected in 2014/15, and Habesha in 2015/16. Messebo and Mugher also undertook expansion projects in 2010/11 and 2011/12, respectively, costing them 1.2 billion Br and 1.3 billion Br.

Cement manufacturing was promoted as a lucrative business. Habesha Cement, probably the most loudly promoted share company, said the cost of producing a quintal would be 96 Br, making it a profitable venture at a retail price of 120 Br a quintal. Habesha Cement S.C. was established on September 1, 2008, the year Dangote was registered in Ethiopia, with around 16,300 shareholders. It promised to build a 2.7 billion Br factory with an annual capacity of 1.4 million tons.

Construction of the Habesha factory is ongoing in the Beketa & Koro Odo Kebele near Holetta town, Oromia. While the Company eyed production in November, 2015, the market has already started changing drastically.

By June, 2011, the cement market was already subsiding. Then, in February, 2012, Derba MIDROC began production, selling its product at 195.5 Br a quintal.

One year short of the end of the GTP, actual demand stands at seven million tons – about a quarter of the 27 million envisaged for next year – according to an April, 2014 study by Mugher Cement S.C. The supply stands at twice the demand at 13.6 million tonnes, the study said.

“One risk of idle plants is sales not matching expectations. Another is that optimism about demand will spur others to invest, leading to a glut of capacity,” Dangote stated on the Dangote Group website.

Dangote is a staple at world economic forums (WEF) and a person with a keen interest in politics. He once donated around two million dollars towards Olusegun Obasanjo’s re-election bid in 2003.

He seemed to speak for all cement factories in Ethiopia with his concerns in investment.

Exaggerated projections could be the culprits, according to Mengistu Hiluf, planning & budget studies, monitoring & evaluations director at the Ministry of Industry (MoI).

The problem is related to the lack of finance for housing and domestic private demand, according to Demoze Gebremichael, Habesha’s finance manager. Abiy Gizaw, general manager of Sunshine Construction, concurs. Construction at this time is hindered by the financial shortage and a lack of capacity from the side of contractors, which may have contributed to the unsatisfying demand for construction inputs such as cement, he said.

Abiy says that the future will see cement prices going down even further, as new factories join the market. Derba’s CEO, Haile Assegdie, expects a similar scenario, as demand is already half the supply, although his factory may have gone as low as it could, with a factory gate price fixed at 184 Br a quintal, and production down to 60pc of capacity to meet the demand, says Haile. Derba, located in the Muger valley, some 70 km north-west of Addis Abeba, is capable of producing 2.5 million tons at full capacity.

But the prices at the cement shops around the locality known as Gotera, in Nifas Silk Lafto District, that Fortune visited on the morning of Thursday May 1, 2014, are far more expensive than this factory gate price. In these shops, a quintal of cement was sold for a low price of 210 Br for Bedrock Inchini Cement, with the highest price of 230 Br for Mugher Cement. A quintal of Derba Cement was sold for 227 Br, National Cement for 220 Br and Messebo for 225 Br.

For Derba MIDROC, its market strategy includes maintaining a list of 15 credit clients, including Sunshine Construction. Most are also trying to get a piece of the export market in neighbouring countries. Derba exported 1.5 million quintals to Kenya in 2013 and so far in 2014, according to Haile.

“But since we are transporting it by road, the quality of roads on the way has become a major hindrance for our venture, but we still intend to increase the amount,” the CEO says.

Derba has strategies for possible changes in the market, says Haile.

“But we don’t expect seismic shifts in the industry when new entrants like Dangote and Habesha start production,” he added.

National Cement, based in Dire Dawa, is selling some of its products in Somaliland. Messebo once sold 15 truckloads to South Sudan. Habesha, which has imported 8,000 tonnes of reinforcement bars from Turkey for its factory construction hopes to be able to export to South Sudan.

Still, with a production cost as low as 96 Br a quintal, low prices may not worry it very much, says Demoze. Moreover, the company hopes that its South African shareholders will bring in the weight of their experience in seeing the company through difficult times, he says.

Global Cement, a UK based magazine, writes that the export options for Ethiopia’s cement manufacturers might appear attractive, while options are limited. Kenya has its own industry; Somalia has major economic and security drawbacks; Ethiopia’s relationship with Eritrea is tense and the market that South Sudan offers will not be enough to satisfy the growing overcapacity, it says, while maritime export is unthinkable for the country, which lacks its own coastline, especially with low-cost cement flowing from India, Pakistan and Iran.

Dangote’s factory, under construction by the Chinese based Sinoma International Engineering under an engineering, procurement and commissioning (EPC) agreement, hopes to exploit its years of experience in the sector to penetrate the ever increasingly competitive cement market in Ethiopia. This factory was intended to have a production capacity of 1.5 million tonnes initially, but that was later increased to 2.5 million tons when the demand was seen growing, according to Teshome Lemma, country manager of Dangote Industries in Ethiopia. It will boost the company’s production capacity in Africa to 40 million tonnes, Teshome said.

“With a relatively lower production cost, we will try to enter the market in a better position,” Teshome told Fortune, though he thinks it is too early to talk about the exact amount of production cost.

Construction in the country is only starting, so there will be enough demand in the coming years, he hopes, adding that South Sudan and Kenya are also potential export destinations.

“We have not yet decided what strategy to follow when we join the local market, but I think it will not be confrontational,” he said.

In Nigeria, the company’s production cost for a quintal of cement is three dollars, but it sells for nine dollars.

Aliko Dangote’s fortune, according to Forbes magazine, has grown from 3.3 billion dollars in 2008 to a whopping 25 billion dollars in just six years, thanks to the publicly owned Dangote Cement.

Will low production costs play well for this company any better than they will for Habesha?

That remains to be seen. For now, only Habesha releases its production cost, while most in this business have avoided answering the question. Surely, Dangote, with an eye over the larger African market and with an ambition towards the LSE, seems to be the one with the capacity to invest in the bigger picture of the cement industry.

Dangote cement has contracted Energo Investment Plc, a Bosnia & Herzegovina-based company, to build a 58 km transmission line from Sululta substation to the factory for 240 million Br. The transmission line will be able to transfer the 40Mw that the factory will need when operational. The construction of the substations is being undertaken by the German-based ABB.

All the major inputs for the production of cement, like limestone, gypsum and clay, are extracted from the vicinity of the factory. A nine kilometre conveyer belt is being built to transport the limestone from the quarry to the plant. A 15km road that will lead to the quarries is also being built by the local Rama construction company. The factory plans to obtain pumice from the Meki area.

Dangote’s project employs around 2,000 people, about half of which are expatriates. The factory will use coal for its energy, burning the raw materials at a temperature reaching 1,550 degrees centigrade to produce the clinker. Yet, accessing the market with Dangote Cement’s full production capacity may not be as easy as constructing its plant.

The Company derives its massive investment in cement from the low per capita cement consumption on the continent. If GDP in Africa continues to grow at the five percent annual rate it has managed over the past decade, demand for cement should grow at seven to 10pc, reckons Andy Gboka of Exotix – a UK-based investment bank, which specialises in frontier markets. His hugely lucrative plant in Nigeria, the Obajana, which is also the biggest cement plant on the continent, proves this right, with each 50 kg sack of cement selling for around nine dollars, of which almost six dollars is profit.

Its factory in Ethiopia enjoys close market access to the central and western parts of the country, and it is feared it could create a glut.

“Construction is expected to increase, with more government and private projects in the pipeline and I don’t think there is too much glut in the sector,” planning head at the MoI says.

Increased exports to neighbouring countries and competitive prices backed by decreased production costs can be a big part of the market matrix of the industry, according to the planning head.

Ethiopia’s government is keen to further develop Ethiopia’s cities and infrastructure and wants to increase its per-capita cement consumption from 35 kg a year at present, to 300 kg a year in the period up to 2017, according to an August, 2013 article by Global Cement. Even with a cement industry the size of Ethiopia’s, the article reads, this represents almost impossible growth. To support this increase in demand, GDP per capita, which is often closely correlated to cement demand, would probably also have to increase fivefold, from 374 dollars, at the time, to 1,870 dollars.

Currently, with ongoing construction, Dangote has created employment for 900 local people at the construction site, who are proving to be good for local businesses, such as restaurants, in the nearby Mugher. Kelemua Awelay, a 38-year-old owner of a restaurant (one of a dozen in the modest town), now gets a significant portion of her patrons from the factory owners; truck drivers carrying cement from Mugher becoming secondary.